E*TRADE’s (NASDAQ:ETFC) stock price has significantly underperformed the broader market in 2011. As of 18-Oct-11, ETFC has decreased 39.68% year-to-date underperforming the -2.52% return of the S&P 500 (NYSEARCA:SPY).
A brief summary of the current market sentiment for ETFC follows:
- FY2011 analyst EPS estimates are $0.67 (vs. a $0.13 loss in 2010)
- FY2012 analyst EPS estimates are $0.86 (28% increase over current FY2011 estimate $0.67)
- Average analyst target price $13.11 (currently trading at $9.65)
- Average analyst recommendation is “hold”
As shown in the chart below, EFTC has trended downward in 2011. The Bollinger Bands (90 days, 3σ) show that ETFC currently has a lower trading support of $5.88 based on a 3σ / 99.7% confidence interval.
(Click charts to expand)
Click to enlarge
Since CMG has traded in a large range during 2011, the implied volatility (76%) of Apr 12 calls at $11 strike price is in line with historical volatility of the most recent 50 trading days (~70%). However, as shown below, historical volatility has recently been trending down.
Click to enlarge
Since ETFC is near the bottom of its Bollinger Band and has recently shown declining volatility, an attractive investment strategy is a covered call consisting of:
- Long 100 shares at $9.65
- Short Apr 12 call at strike price $11 (~$1.60 premium)
Declining volatility will benefit a short call position even if the underlying remains unchanged.
This strategy would allow an investor to effectively buy ETFC for $8.05 per share (excluding trading costs) creating a potential upside return of 31% ($12.6 / $9.65 -1). This covered call strategy would not lose money until ETFC fell below $8.05 per share.
Data from Yahoo! Finance and ETFC’s publicly filed 10-Ks and 10-Qs
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.